Why Lulu’s Fashion Lounge Stock Was Falling Earlier Today

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What happened

Shares of Lulu’s Fashion Lounge Holdings (LVLU -18.70%) were trading down 17.5% as of 11:28 a.m. ET on Wednesday. The company reported revenue growth of 27% over the year-ago quarter, but lower margins put pressure on profitability, sending the stock down.

Year to date, the stock has fallen 37%, underperforming the broader market.

So what

Overall, Lulu’s business is performing relatively well, given the macroeconomic headwinds. Management credited higher shipping costs and a higher level of returns for sending gross profit margin down nearly 4 percentage points to 45.8% during the quarter. Lower margins sent earnings per share down to $0.15 from $0.28 in the year-ago quarter.

There were plenty of positives, however. Active customers surged nearly 53% year over year (YOY) to 3.2 million, and average order values increased 13%. These numbers indicate that the brand remains strong and is continuing to win new customers in a challenging economic climate.

Now what

Management reiterated its previous guidance, calling for full-year revenue to increase between 17.1% and 27.8% over 2021.

One of Lulu’s competitors, Revolve Groupreported the same level of revenue growth in the last quarter but reported a lower rate of increase in active customers. This puts Lulu’s in a stronger position to win market share.

However, consumer spending on fashion apparel took a dive in July. Revolve reported that sales growth decelerated to about 10% YOY. Lulu’s management said it is taking a cautious approach with respect to the outlook but noted that things were looking better toward the end of July.

The stock is trading at a much lower valuation than a year ago, so very low expectations are priced in already. This sets up the potential for a sharp rebound once the economic environment stabilizes.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.



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